National Labor Relations Board v. Bildisco & Bildisco – Oral Argument – October 11, 1983

Media for National Labor Relations Board v. Bildisco & Bildisco

Audio Transcription for Opinion Announcement – February 22, 1984 in National Labor Relations Board v. Bildisco & Bildisco

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Warren E. Burger:

We will hear arguments next in National Labor Relations Board against Bildisco and Bildisco, and Local 408, International Brotherhood of Teamsters, against National Labor Relations Board.

Mr. Wallace, I think you may proceed whenever you are ready.

Lawrence G. Wallace:

Thank you, Mr. Chief Justice, and may it please the Court, the consolidated cases involving the same Chapter 11 debtor in possession, the Court of Appeals in this case prescribed a standard to be used by a bankruptcy court in determining whether to approve an application to reject a collective bargaining agreement as an executory contract, and how that approval of such rejection operates retroactively to deprive employees of rights under the contract during the entire post-bankruptcy petition period, and thus to deprive the National Labor Relations Board of authority to remedy as an unfair labor practice the debtor in possession’s unilateral departure from the contractually prescribed terms and conditions of employment during the post-petition, pre-rejection period.

We believe the court of appeals erred in both respects.

Because I have only 15 minutes, and hope to reserve a little time, because much can happen during the ensuing 45, all I can try to do is summarize what we think are the governing principles, and why our position best accommodates the two federal statutes involved and maximizes the effectiveness of each.

All the courts of appeals that have considered the question have agreed, and the respondent in this Court does not dispute that a special standard must govern rejection of a collective bargaining agreement.

This is partly because of the special nature of such an agreement, as prescribing a code of industrial conduct, and because the employees, unlike others, are totally dependent for their livelihood on their relation with the employer.

But the basic reason is because of a statutory conflict between the application to a collective bargaining agreement of the bankruptcy court’s authority to set aside an executory contract and the Labor Relations Act’s prohibition of mid-term modification or termination of a collective bargaining agreement unless both parties to the agreement agree.

Warren E. Burger:

Mr. Wallace, is it so much a conflict between two statutes as a problem of executory contracts of a different character, one with a supplier, perhaps, and one with an employee?

Is that really conflict in the statutes?

Lawrence G. Wallace:

Well, the Labor Act does say that there cannot be midterm rejection or modification, termination or modification of a labor contract, of a collective bargaining agreement, unless both parties agree pursuant to prescribed procedures, and yet there is reason to think that the authority of the bankruptcy court to set aside executory contracts does extend to collective bargaining agreements.

On the face of the statutes, they do look in opposite directions, and Congress has not explicitly said how this conflict should be resolved, but as we explain in our brief, we believe it implicitly ratified the resolution that had been developed by the Court of Appeals for the Second Circuit, which was the only appellate decision at the time Congress enacted the Bankruptcy Code, and Congress did indicate some awareness of those decisions.

William H. Rehnquist:

How did Congress indicate that awareness?

Lawrence G. Wallace:

In legislative history of prior amendments to the Bankruptcy Act, but not in the legislative history of the code itself, but because the same Committees dealt with–

William H. Rehnquist:

Well, then, what is it you rely on to say that they implicitly ratified a court of appeals decision?

Lawrence G. Wallace:

–Well, just the general principle that Congress is presumed to be aware of how the law has developed, but–

William H. Rehnquist:

Now, wait a minute, Mr. Wallace.

Is there any general principle that Congress is presumed to be aware of every district court, every court of appeals decision, or every decision of this Court, however episodic it may be?

Lawrence G. Wallace:

–Well, we relied basically on the Lorillard case, which refers to that principle, but our main argument is that in any event, the Second Circuit’s resolution is the proper one, regardless of whether it can be said that Congress implicitly ratified it, and under that standard–

Harry A. Blackmun:

We really have three separate standards expressed by the courts of appeals, don’t we, this one, the Nigra case, and the Eleventh, and–

Lawrence G. Wallace:

–Yes.

Harry A. Blackmun:

–whatever… Brada Miller.

Lawrence G. Wallace:

Brada Miller is what we have been calling it, which is–

Harry A. Blackmun:

And you go for the allowance standard way back by Judge Moore a number of years ago?

Lawrence G. Wallace:

–Well, and Judge Mansfield’s opinion in REA Express for the Second Circuit.

We do think that the Eleventh Circuit’s opinion is very close to that.

Although it explicitly says it disagrees with it, it does say in another passage that it thinks that a factor that the Second Circuit says is essential is going to be an important inquiry in many, many instances.

The case will turn on that.

And that is the inquiry whether rejection of the collective bargaining agreement is necessary to avoid collapse of the business as necessary to the preservation of the viability of the business.

This, we believe, should be the central inquiry, because for one thing it is a question that is properly within the competency of a bankruptcy court to determine, unlike the kind of second guessing of the collective bargaining process that otherwise is suggested in opinions about balancing the equities to determine whether terms and conditions of employment other than those bargained for would be fairer under the circumstances to both the employees and the employer, and to take into account what is the likelihood that a strike might be provoked if the collective bargaining agreement is set aside, the kinds of inquiries that Congress, as this Court has emphasized, has left to the bargaining process and the parties themselves, and has prohibited even experts in labor management relations, such as the Labor Board, from second guessing the bargaining process with respect to, and the kind of inquiries that it is difficult to conceive of Congress asking a bankruptcy court to resolve.

Lawrence G. Wallace:

And while the standard focusing on preservation of the business, its viability, thus would preserve the basic policy of the Bankruptcy Act, it would also maximize preservation of rights under the Labor Act by reducing only to a risk of error in the resolution of that question the preservation of rights that otherwise would survive under the labor contract, and by making it less apt that the bankruptcy court’s decision will provoke a work stoppage because of unacceptability to the employees who have been operating under the contract if they perceive that the question that has been answered is whether their contract rights can survive in any event, and that has been the inquiry.

It also puts in the proper context for bankruptcy court resolution such emotional matters as evidence on anti-union animus that may have motivated the employer to go into bankruptcy.

The bankruptcy court by and large should regard that as going to the credibility of the employers being able to show that it is necessary in the context of a comprehensive look at his operations and his obligations, that it is necessary to set aside the collective bargaining agreement in order for the business to survive.

Sandra Day O’Connor:

Mr. Wallace, if it is legitimate for a company to file a bankruptcy petition because executory contracts are making successful continuation of the business impossible, is it permissible for a company to file a bankruptcy petition for the express purpose of freeing itself from an executory collective bargaining agreement that it feels is making it impossible?

Lawrence G. Wallace:

I see nothing improper about that.

We see nothing improper about that, if the company can make the requisite showing in the context of all of its obligations and operations that it needs to have that contract set aside in order for the business to remain a viable one, or to be converted into a viable one.

Lewis F. Powell, Jr.:

Mr. Wallace, at one page in your brief, you state that CA2 standard was… that a showing of will fail must be made by the debtor.

On the next page, you use the term “likely to fail”.

Do you make a distinction between the two?

Lawrence G. Wallace:

Not really.

Lewis F. Powell, Jr.:

Not really?

Lawrence G. Wallace:

It is a predictive matter.

There is no way that the future can be proved with certainty.

On the relation back issue, if I can advert to that basically, we see no conflict between the bankruptcy law and the labor law.

The bankruptcy law sharply differentiates between pre-petition and post-petition obligations of the trustee or debtor in possession in order to encourage persons to continue to provide goods and services.

A vendor, for example, obligated to provide lumber or potatoes or what have you, is prohibited by the bankruptcy law from terminating the contract merely because the other party goes into bankruptcy, and the obvious meaning of that is that as he continues to supply those goods until the contract is set aside he is operating under the terms of the contract.

The same thing would be true of employees where terminable at will but who are kept on by the debtor in possession.

It would never occur to anyone that the debtor in possession could four months later go to the bankruptcy court and ask the bankruptcy court retroactively to change the salaries or the health benefits that those employees were told they were entitled to while they were performing those services, and the mere fact that there may be reason to ask the court to set aside further obligations under a collective bargaining agreement does not provide a reason to treat employees operating under that agreement any differently.

If anything, it brings in considerations of the Labor Act as well.

I would like to reserve the balance of my time.

Warren E. Burger:

Very well.

Mr. Zazzali.

James R. Zazzali:

Mr. Chief Justice, and may it please the Court, I adopt the position of the Solicitor General with respect to the standard issue, and instead I would move on to the subject of 8(D), which is the requirement in the National Labor Relations Act which compels a party seeking to modify or terminate a contract to give notice to and to negotiate with the other party.

We think that 8(D) should be a condition precedent to the rejection of a union contract, because we think 8(D) is in the public interest as a public statute designed to protect the common weal.

We are only asking for purposes of this discussion that not all of the trappings and the trimmings of 8(D) be superimposed upon the employer or the union.

Rather, we simply ask a party to give notice to and to negotiate with the other party to that contract before the contract is automatically rejected ipso facto.

If the employer refuses to come to an agreement, and mind you that we have never suggested that concessions must be made by the employer, but if the renegotiations do not work out, or if the union simply refuses to negotiate, the employer is then free to seek rejection of the contract in the bankruptcy court, and Justice O’Connor, in response to your question, we do indeed agree with the Solicitor General that generally a labor contract is an executory contract which may be, in appropriate circumstances, subject to the correct standard, be rejected.

But again, as a legitimate and viable condition precedent to that rejection, we think there should be negotiations.

That is a moderate and a modest proposal.

It is a reasonable and a reasoned position.

James R. Zazzali:

It is designed, above all, to again protect the public interest and to pay due respect to the Bankruptcy Code, and to the interests and to the rights of employers who are financially embarrassed.

It allows, to use the phrase of the fifties, a peaceful coexistence between management and labor, between employees and employer.

Byron R. White:

You think, though, that they must comply literally with all the requirements of 8(D)?

James R. Zazzali:

I think in terms of the policy considerations here, because there are multiple requirements, I don’t think so, Justice White.

Byron R. White:

Well, then, what is the issue, 8(D) or not?

James R. Zazzali:

I think… I think–

Byron R. White:

Or just notice and reasonable amount of bargaining?

Is that it?

James R. Zazzali:

–No, it is in negotiations.

Obviously, we would like to see notice to the Federal Mediation and Conciliation Service, which is mandated, notice to the state agencies, but I think in an appropriate exercise of discretion those requirements can be dispensed.

It seems the key… the key responsibility, to use the vernacular, is to get the parties together in the public interest to bang out an agreement if at all possible, and we would therefore urge that–

Byron R. White:

Well, they don’t have to… you know, a lot of bargaining goes on for a long time, and if it is going to go on for a long time, the company may… you may not have to bargain any more.

James R. Zazzali:

–Your Honor, I can appreciate the concern about time.

It is a suggestion that has been made by some of the parties to the briefs and some of the amici in the case.

We would note, Number One, that this is not the Railway Labor Act, which has a complex and convoluted series of requirements for negotiations.

William J. Brennan, Jr.:

No, but I gather, Mr. Zazzali, you would require them to bargain to impasse, would you not?

James R. Zazzali:

Yes, but impasse–

William J. Brennan, Jr.:

That can be a long time.

James R. Zazzali:

–It can be–

William J. Brennan, Jr.:

I gather your position is, they must bargain to impasse before the debtor in possession may seek rejection.

James R. Zazzali:

–That’s correct, but given the exigencies of the particular situation, that is, bankruptcy, and given the responsibility of both parties and, we hope, the maturity of both parties, impasse can be in two weeks, it can be achieved in two days, it can be achieved in two hours.

Byron R. White:

It could be achieved in six months, too.

Two years.

James R. Zazzali:

That’s correct, but I think it is appropriate for the bankruptcy court in a proper exercise of its discretion to perhaps order an expedited negotiation schedule.

There are–

Byron R. White:

If the union has notice, and surely it would, of an application to reject the collective bargaining agreement, the union could certainly participate in the hearing, couldn’t it?

James R. Zazzali:

–It could, Your Honor, but that is something considerably different than negotiations.

Participation–

Byron R. White:

That may be.

It may be.

Byron R. White:

But what if the… what if the… what if the standard is as high as you would like it to be, the standard for rejection?

You can… you can assume that standard, and if the union can get in its two bits worth as to whether that standard is satisfied, why aren’t… why isn’t that enough?

James R. Zazzali:

–Because I don’t–

Byron R. White:

Because if the court were going to conclude that, yes, the company would or would be likely to fail unless there were modifications, why would you have to go off and negotiate some more about it?

James R. Zazzali:

–Because as we understand the bankruptcy court’s determination, it is an all or none decision by the bankruptcy court to terminate or not to terminate, to reject all parts of that collective agreement or none at all, to reject the non-monetary as well as the monetary benefits.

William J. Brennan, Jr.:

Well, does that requirement, does that suggest that even if they arrived at an agreement, even if they did, the bankruptcy court could still perhaps even sui sponte direct rejection?

James R. Zazzali:

I can conceive of that happening, but of course, sui sponte, the court in an exercise of its discretion… it might well be an abuse of discretion–

William J. Brennan, Jr.:

The court, in other words, would not be concluded by the agreement?

James R. Zazzali:

–Absolutely not, but going back to Justice White’s inquiry, it’s too late by the time we get to bankruptcy court to have a hearing on rejection to negotiate out the problems.

It seems to me to make more sense to have the parties sit down, discuss, negotiate, call it what you will, work out these difficulties.

The union–

Byron R. White:

They would in a sense be negotiating before the bankruptcy court–

James R. Zazzali:

–I would–

Byron R. White:

–with somebody there refereeing the struggle.

James R. Zazzali:

–I would not encourage the bankruptcy court to play an active role in the negotiations.

It can maintain a monitoring position perhaps or a supervisory role, but to be actively involved in the negotiations is probably unwise.

Byron R. White:

What is your view if the bankruptcy court… say the bankruptcy court accepted everything you suggest.

They reach impasse, and then the bankruptcy court holds that the contract must be rejected, or may be rejected?

What then?

What is your view of the relationship between the trustee or the debtor in possession and the union?

Are there then negotiations?

James R. Zazzali:

I, although–

Byron R. White:

Or do you know?

James R. Zazzali:

–I think there should be negotiations.

I think the ball game is effectively over at that point.

It is beyond the twelfth hour.

Byron R. White:

But… The collective bargaining contract has been rejected, but that doesn’t mean that you don’t represent the majority of the employees, does it?

James R. Zazzali:

You are correct, Your Honor, but on a practical level, to obtain anything of consequence in the post-rejection period simply, according to the experiential data, are not going to happen.

Experience has indicated that we are not going to resolve it after rejection.

The sensible approach is to let the parties, if at all possible, get together, work out their difficulties, and then if the parties cannot work out their difficulties, let it go to the bankruptcy court, let the bankruptcy court hold the hearing on rejecting the contract.

James R. Zazzali:

At least the union would have been… and the employer would have been placed on their respective spots by having to, to use the vernacular again, to put up or shut up.

Certainly a union in that situation… and experience has indicated that the vast majority of unions do face up to their responsibilities, and according to the recent headlines do meet the necessity, the exigencies of the moment by renegotiating contracts.

That is why this is a public statute, and the distressing aspect of this case is that some of the amici and others have suggested that it is a fight between… exclusively between employees and employer, between labor and management, between big labor and big management, between the Orioles and the Phillies, and it is none of those things.

What it is, it’s a public statute designed to protect the public interest.

Twelve years ago, in Pittsburgh Plate Glass, this Court said precisely that when it advised us that the purpose of 8(D) is to facilitate agreement rather than economic warfare, and thereby avoid interruptions in the production of goods and in the flow of commerce, and it is by the simple expedient of sitting down and talking out the problems, which is what this labor relations business is all about in the last analysis, that we are urging upon this Court.

John Paul Stevens:

May I just be sure I understand your position?

On the 60-day notice requirement, Section 8(D), do you say that applies or does not apply?

James R. Zazzali:

I think that literally it all should apply, but I think in a… since we are seeking an accommodation of the two statutes, and since I think that reconciliation is in the public interest, I think both statutes have to bend to meet that public interest, and therefore literally I don’t think we have to accept all the requirements of 8(D), but simply the guts to get those parties together.

John Paul Stevens:

Well, in other words, I think what you are saying is, no, it doesn’t apply.

It may be–

James R. Zazzali:

I would–

John Paul Stevens:

–It may be excused in certain circumstances.

James R. Zazzali:

–I think the public interest would tolerate something less than total compliance.

John Paul Stevens:

Well, what you are saying, a court does not have to apply the 60-day notice requirement in all cases?

James R. Zazzali:

I would think… yes, Your Honor, I would–

John Paul Stevens:

It seems to me, then, that you are really not arguing that 8(D) applies, but rather, that you are arguing that the extent to which there has been pretermination negotiation and notice and bargaining is a part of a standard that should be applied by the bankruptcy judge in deciding whether or not to approve rejection.

James R. Zazzali:

–Respectfully, Justice Stevens, I am not arguing that.

I think that there should still be a per se requirement in accordance with Section 8(D) to get the parties together to negotiate out their differences.

John Paul Stevens:

It is a per se requirement that requires a modest rewriting of the statute.

James R. Zazzali:

It might require, in Justice Frankfurter’s phrase, rather some elucidating litigation in order to attempt to reconcile these differences.

We are here to accommodate the statutes.

I think any accommodation does not necessarily mandate a rewriting of the statute perhaps reposing in the district court and the district bankruptcy court the appropriate exercise of discretion.

That is how the common weal can be best served in our judgment.

Byron R. White:

Of course, the court below really held that the trustee or the debtor in possession was a separate entity.

James R. Zazzali:

Yes, which I think is–

Byron R. White:

And you haven’t addressed that.

If we agree to them, all the rest of this is irrelevant.

James R. Zazzali:

–If you agree, Your Honor.

I think the commentators in other circuits have soundly repudiated the new entity theory on the grounds–

Byron R. White:

Well, we haven’t yet.

James R. Zazzali:

–That’s correct, Your Honor.

On the grounds that it is a… it is simply a legal fiction.

As Judge Tuttle said in the Brada Miller decision–

Byron R. White:

Nevertheless, that was the ground for the court of appeals judgment, wasn’t it?

James R. Zazzali:

–That’s correct, and the Eleventh Circuit roundly disagrees with that, saying that this is at best a new juridical entity rather than a new entity.

I think most of the commentators and the courts below, admittedly not this court, have urged that–

William H. Rehnquist:

When you say commentators, Mr. Zazzali, who are you referring to?

James R. Zazzali:

–I think, for example, the article by Countryman quoted in a number of the briefs, and I think the Michigan Law Review article.

William H. Rehnquist:

Was that an article, or was it written by students?

James R. Zazzali:

I think the Countryman article was written by a law professor.

William H. Rehnquist:

How about the Michigan Law Review?

James R. Zazzali:

That I am honestly not sure of, Your Honor.

William H. Rehnquist:

You commend it to us anyway?

James R. Zazzali:

Well, I do think that I commend the conclusion to you that the new entity theory does not stand for the simple reason that it makes no sense, as the Eleventh Circuit said, to say that a new entity is bound by an old contract.

Either a new entity is or is not bound, and the entire problem of new entity, as the successorship theory, gives pause.

To say similarly that an employer who is a new entity must nevertheless go and seek rejection of a contract makes no sense at all.

And I think… not a commentator, but I think at least one and perhaps two of the circuits have said the same thing, that it is… it makes no sense to say that the employer who is a new entity must nonetheless go in and apply to reject the contract… the contract.

If he is a new entity, clearly, a fortiori, he is not bound by the old contract.

The difficulty with so much of this is that rather than reconciling the two statutes in favor of coexistence, we have the circuit below in the matter sub judicii, really sanctifying the Bankruptcy Code over the national labor policy, and that is why I suggested, Justice Stevens, that we really aim towards some kind of a sensible accommodation of the conflicting statutes.

It is interesting that the employers are saying today, reject the contract and therefore the union has the right to strike.

That sets labor relations on its head in this nation, and it seems to me is a deja vu return to the policies of 50 years ago, when precisely… it was precisely the Act and this Court which sought to encourage meaningful, peaceful collective bargaining as an alternative to the right to strike.

And instead, we now have employers saying, gee, if you have the contract rejected, the unions then have the right to strike.

That is not healthy.

Warren E. Burger:

Are you suggesting that there is any diminution of the right to strike if the contract is cancelled by the bankruptcy process?

James R. Zazzali:

Not at all, clearly, and that’s the problem.

Clearly, the union shall have the right to–

Warren E. Burger:

They are just where they were before the contract.

James R. Zazzali:

–That’s correct.

The union shall have the right to strike, and then we return to the test of strength that–

Byron R. White:

Well, if they are where they were before the contract was entered into, they were… they represented a majority of the employees, then I suppose they could get an order to bargain.

James R. Zazzali:

–That’s one of the questions before this Court.

The problem, of course, is–

Byron R. White:

No, I don’t know whether it is… this is after rejection.

Suppose even if the court of appeals is right, this is to be treated as a separate entity, it doesn’t mean that the separate entity doesn’t have to bargain once the contract’s been rejected.

James R. Zazzali:

–That’s correct, but–

Byron R. White:

And if the debtor in possession refused to bargain with the majority representative of its employees, I would suppose it would commit an unfair labor practice, wouldn’t it?

James R. Zazzali:

–That’s correct, Your Honor, but keep in mind that the contract has not only been rejected, but every part of that contract is being rejected, including seniority provisions, and therefore what will happen is what is happening, according to the documented cases, and employees are being laid off and the union is losing its majority.

In closing, I thank Your Honors, and would urge that the reconciliation we have urged be considered rather than these employees be treated, frankly, as inventory under the Bankruptcy Code.

Thank you.

Warren E. Burger:

Mr. Zackin?

Jack M. Zackin:

Mr. Chief Justice, and may it please the Court, although it may be somewhat unusual, I think it appropriate to begin with a discussion of what this case is not about.

First, this case does not concern the issue of whether a financially healthy company should be or will be permitted to utilize the provisions of Chapter 11 for the sole purpose of escaping from a union contract.

Such a factual setting and motivation have never been alleged in this case, and there is no suggestion in the record that this was Bildisco’s situation or motivation.

In addition, the balancing of the equities test formulated by the Third Circuit will itself prevent this result.

Under this test, the bankruptcy court is required to scrutinize the good or bad faith of the debtor who seeks to reject a labor contract.

Moreover, if a company is not truly financially distressed, the equities will undoubtedly tip in favor of the union, and rejection will not be permitted.

John Paul Stevens:

May I ask… This is following up on Justice O’Connor’s question… if the sole purpose of a bankruptcy petition was to escape a labor contract which the company honestly believed would cause bankruptcy, cause insolvency and a failure, is that bad faith?

Jack M. Zackin:

No, I don’t think that is bad faith, Justice Stevens.

I think that–

John Paul Stevens:

What is bad faith?

Jack M. Zackin:

–I do not think it is bad faith.

I think–

John Paul Stevens:

But what does the concept of bad faith embody, then, insofar as it is related to labor relations?

Jack M. Zackin:

–I think that if it is found by a bankruptcy court that a company can continue to pay its obligations as they become due and still honor its union contract, but nevertheless–

William H. Rehnquist:

Then they wouldn’t be bankrupt.

Jack M. Zackin:

–Well, that’s correct, Justice Rehnquist, and if they tried to use Chapter 11 merely to increase their profits by rejecting the union contract, that would constitute bad faith, and I think in that situation not only would the application to reject the contract be denied, but the case itself, the Chapter 11 case, should be thrown out of bankruptcy court.

Thurgood Marshall:

You couldn’t use Chapter 11, could you?

Jack M. Zackin:

You should not be permitted to use Chapter 11.

Thurgood Marshall:

Well, I mean, normally, without the union being involved, if you aren’t broke, you can’t use Chapter 11.

Jack M. Zackin:

That’s correct, Your Honor.

Jack M. Zackin:

There is an implicit good faith requirement in the Bankruptcy Code.

William H. Rehnquist:

Well, is there something over and above the good faith requirement that extends across the board to consideration of executory contracts by the debtor in possession that applies to labor contracts in particular, or is a labor contract protected by no more than the requirement of good faith that you have just spoken of, which I think extends across the board in executory contracts?

Jack M. Zackin:

I believe that it does extend across the board, Justice Rehnquist.

I think that if you look at the specific provisions of the Bankruptcy Code itself, there is certainly no indication that Congress intended collective bargaining agreements to be treated differently than any other executory contract.

I think that what the Third Circuit recognized was that there are competing policies, as expressed in the national labor laws, and that in order to accommodate those policies, a special standard should be adopted so that the rights of organized labor enjoy a special status.

But if one looks strictly at the letter of the Bankruptcy Code, there is absolutely no indication that that was the intent of Congress.

William H. Rehnquist:

Of course, if one looks at the National Labor Relations Act, there is no indication that Congress thought an employee was going into bankruptcy at midterm and rejecting the contract.

Jack M. Zackin:

That’s correct, Justice Rehnquist, but I think it is important to note that Congress in enacting the Bankruptcy Code did provide for one specific exception with respect to the rejection of labor agreements, and that is Section 1167 of the Bankruptcy Code, which applies to collective bargaining agreements negotiated under the Railway Labor Act, and in that case Congress saw fit to say to the bankruptcy courts, you may not, you may not modify or terminate this contract except if the debtor complies with the midterm modification requirements in the Railway Labor Act.

They didn’t do that in the case of contracts negotiated under the National Labor Relations Act.

Warren E. Burger:

Was that because common carriers’ responsibilities to the public as a whole are different from perhaps a building contractor?

Jack M. Zackin:

I think that’s correct, Chief Justice.

I think that Congress recognized that there are different considerations with respect to carriers engaged in interstate commerce, and those employees perhaps deserve a bit more protection than employees in certain other industries.

Warren E. Burger:

Well, it isn’t so much a question of the employees being protected as the traveling public being protected–

Jack M. Zackin:

I think that’s–

Warren E. Burger:

–by continued service.

Jack M. Zackin:

–I think that’s true.

I think there is a long history of legislation with respect to public transportation and common carriers, and Section 1167 is merely an outgrowth of that, recognizing that there are special situations which apply to that industry.

Sandra Day O’Connor:

Mr. Zackin, what in your view is the underlying purpose of the Bankruptcy Act itself?

Is it basically there to try to protect creditors, or what?

Jack M. Zackin:

I think that the underlying purpose of at least Chapter 11 of the Bankruptcy Act as expressed by Congress is to promote the reorganization of distressed business entities as an alternative to liquidation, and that policy is found–

Sandra Day O’Connor:

To what end?

To protect the creditors, or to protect employees, or what?

Jack M. Zackin:

–All… both, and… both, Justice O’Connor.

I think Congress recognized that if rehabilitated, a business can, Number One, continue to provide its employees with jobs, Number Two, pay its creditors at least something on the dollar, and Number Three, provide a return to its investors, its shareholders, whereas if a business is liquidated in Chapter 7 of the Bankruptcy Code, the statistics show that none of those eventualities is likely to result.

Certainly the employees will be without jobs.

Creditors are likely to receive very little, if any, any dividend, and shareholders’ interests are obviously expunged.

So, I think there is a broad public policy behind the Bankruptcy Code that involves all the interests, and I think that what the Third Circuit did was recognize that public policy, and decide that it was improper to adopt the standards espoused by the union which–

Byron R. White:

So you do defend… you do defend the theory of the court of appeals?

Jack M. Zackin:

–I very definitely defend that theory, and both based on the new entity theory, which was discussed, and also, even if one rejects that theory, I think as the Eleventh Circuit did in Brada Miller, one still can reach precisely the same conclusions as the Third Circuit.

Byron R. White:

What do you think the Eleventh Circuit standard is for rejection?

Jack M. Zackin:

I think the Eleventh Circuit standard is very similar if not identical to the standard that the court below voiced.

That is, that it is a balancing of the equities, that the test voiced by the union and the National Labor Relations Board is simply in derogation of the rights of creditors and shareholders and even non-union employees.

William J. Brennan, Jr.:

Do you think the same of the Second Circuit standard?

Jack M. Zackin:

No, I think the Second Circuit standard is different.

I think the Second Circuit has basically adopted the standard which the union and the board–

Byron R. White:

Well, under the Second Circuit standard, which would either require a showing at the threshold that you will fail or you are likely to fail… Is that it?

Jack M. Zackin:

–Yes.

Byron R. White:

Under that standard, how do you understand it?

Would… Suppose it were clear that if you rejected ten other executory contracts, you could then survive and still pay the wage under the collective bargaining contract.

Do you think in that… under the Court of Appeals for the Second Circuit standard that you have to prefer the collective bargaining contract as compared with all other burdens?

Jack M. Zackin:

That is precisely the way I read the Second Circuit standard, and precisely what I believe that the petitioners here are urging to this Court.

Byron R. White:

Would it be inconsistent with the Second Circuit standard if the court said, well, this company is going to fail unless something is done about its executory contracts?

Now, we are going to make everyone share the burden.

We are going to reject the labor contract along with the others.

Is that inconsistent with the Second Circuit?

Jack M. Zackin:

I think that if the Second Circuit–

Byron R. White:

Would that be inconsistent with the Eleventh Circuit standard?

Jack M. Zackin:

–I think that would be more consistent with the Eleventh Circuit standard.

I think what the Second Circuit standard leads to is the obligation on the part of the debtor and the bankruptcy court to sacrifice everybody else’s rights, whether they be creditors, non-union employees, or shareholders, if those rights are sacrificed and the debtor can continue to adhere to the collective bargaining agreement.

I think that it elevates collective bargaining rights to that dominant position, and I don’t think that… that’s certainly not what the Eleventh Circuit did, certainly not what the Third Circuit did.

I think that… they… it is truly a balancing approach that those circuits took, where one must weigh the competing interests of all the parties involved in a reorganization proceeding and determine whether the benefit stemming from rejection of a labor agreement to the debtor overall and its creditors and shareholders outweighs the harm to employees.

Byron R. White:

Well, your preference isn’t an outright affirmance, but your next vote is for the Court of Appeals for the Eleventh Circuit, I take it.

Jack M. Zackin:

I think that it is interesting what the… as I read the Eleventh Circuit decision in Brada Miller, they began with a criticism of the so-called new entity theory, but they wound up adopting, as I read it, almost verbatim the test espoused by the… or formulated by the Third Circuit, which is the balancing approach, as well as the Third Circuit’s conclusion that a debtor in possession need not comply with Section 8(D) of the National Labor Relations Act.

I think they got to the same place.

They just approached it by different… by a different street.

Byron R. White:

Yes, but if it is a new entity, why is there any need for rejection?

Jack M. Zackin:

Well, I think the reason is that that’s the scheme that Congress has set up.

I think what Congress did was to provide–

Byron R. White:

I know, but there isn’t any theory under the labor law, is there?

If it is a new entity, there isn’t any collective bargaining contract to be lived up to anyway.

Jack M. Zackin:

–Well, there is still–

Byron R. White:

Is there?

Jack M. Zackin:

–Yes, there is.

I think there is.

Byron R. White:

Strictly under labor law?

Jack M. Zackin:

I think that there… the pre-bankruptcy contract continues to survive.

William J. Brennan, Jr.:

Something like the successor entity theory or something?

Jack M. Zackin:

I think that that’s a very apt analogy which has been made by several of the circuits.

Byron R. White:

Well, then, it is not a new entity theory, is it?

It is just a successor entity theory.

Jack M. Zackin:

I think that as I read… as I read–

Byron R. White:

Which wouldn’t really be bound then by 8(D), if it is just a successor entity rather than a separate one.

Jack M. Zackin:

–The reason that a new entity is still required to reject or assume a contract even though it is not a party to the contract is because Section 365 requires that debtors in possession take that action.

I think what 365 stands for is, and the cases which we cite in our brief, is that the filing of a Chapter 11 petition doesn’t terminate a contract.

It suspends the enforcement of the contract.

Byron R. White:

Well, you have to have the new entity theory in order to be able to make changes in the collective bargaining contract without getting in trouble with the Labor Board, I take it.

Jack M. Zackin:

Not necessarily.

Byron R. White:

But that is close, though, isn’t it?

Jack M. Zackin:

It would certainly help.

Byron R. White:

Yes.

0 [Generallaughter.]

Jack M. Zackin:

But what the Third Circuit also said, and which we also agree with, is that once a collective bargaining agreement is rejected, the rejection relates back to the date on which the Chapter 11 petition was filed, so that in our case, we obtained bankruptcy court permission to reject in December.

The case had been filed the previous April.

What the Third Circuit said was that the National Labor Relations Board was then precluded from finding that any changes be made in the terms and conditions of employment from that April to December date, because there was simply no contract.

It had been terminated as a matter of law on the date of the filing.

We think that’s correct.

We think that Section 365(G) of the Bankruptcy Code mandates that result.

It clearly provides that once a… any executory contract is rejected, the rejection is deemed a breach as of the date immediately prior to the date of the petition, so that–

John Paul Stevens:

May I ask, and this is prompted by Mr. Wallace’s closing remarks, what standard applies to the compensation of the employees during that interval?

What frame of reference should govern?

Jack M. Zackin:

–I think that if the contract is rejected, then the employees are entitled to the reasonable value of their services which they render in that interim period, and I think that that is not a difficult calculation to make.

I think the courts can look to what the standards in that industry are in the particular geographical area and determine what were the reasonable value of the services provided by those employees, and if they have not been paid that reasonable value, we concede that they are entitled to file claims as administration creditors and receive a first priority in payment for the difference between the reasonable value and what they were actually paid.

Warren E. Burger:

Would you agree that the contracts, the collective bargaining agreement is strong evidence of the reasonable value?

Jack M. Zackin:

I think it may be in certain instances, but it also may not be indicative if in fact the economic situation of the employer has changed, has deteriorated to the point where he can no longer legitimately pay the compensation required in the collective bargaining agreement.

William J. Brennan, Jr.:

Well, would there be any room for any bargaining over what is reasonable value under your approach?

Jack M. Zackin:

I think that if we got to the point where the labor agreement is rejected, there would be bargaining in the sense of there may be settlement discussions.

I would think there would be a claim filed by the employees or by the union on behalf of the employees for the value of those services, and it may very well be, as in all contested matters, there may be settlement negotiations between the debtor and the union to determine what those claims are.

Warren E. Burger:

What about the hiatus that would occur as here?

Suppose the hiatus between the filing of the bankruptcy petition and the determination on the contract was several months.

What kind of a paycheck is going to be issued to these men?

Jack M. Zackin:

I think it is important to note that under the Third Circuit’s test, the debtor in possession, although a new entity, is still an employer, subject to the provisions of the National Labor Relations Act.

It is required to bargain.

It must sit down, if requested by the union, and bargain over new terms and conditions.

So it is not a situation where the union is forced to sit back forever and wait until the debtor decides whether it wants to assume or reject the contract.

It has the right to compel bargaining.

And that bargaining presumably will be based upon–

Byron R. White:

But you say the employer meanwhile has the right unilaterally to lower the wages.

Jack M. Zackin:

–I think much like a successor, Justice White.

You indicated that there was some difference between the successor doctrine and the new entity doctrine, and certainly there is, but I think where the successorship principles make sense in this context is in the sense that a debtor in possession should be free to set the initial terms and conditions of employment, which is not to say that he does not then have to bargain with the union over new terms and conditions.

Byron R. White:

But ordinarily, outside of bankruptcy, a successor employer can’t unilaterally modify the wages.

Jack M. Zackin:

Well, I think that… I think that this case, as I read it, as I read what this Court did in the Byrnes case, said that a successor is not necessarily bound by the terms and conditions of its predecessor’s contract, and is free to set the terms and conditions of employment initially, which again is not to say that it doesn’t have the obligation to bargain in good faith.

Lewis F. Powell, Jr.:

Mr. Zackin, how many employees does the debtor now have?

Jack M. Zackin:

Now, Your Honor, there are ten employees.

Lewis F. Powell, Jr.:

At the time the petition was filed, there were three?

Is that right?

Jack M. Zackin:

At the time–

Lewis F. Powell, Jr.:

No, there were 18?

Jack M. Zackin:

–There were 18 at the time that the Chapter 11 petition was filed.

At the time we requested that the bankruptcy court permit rejection, it was down to three.

There are now ten employees, although only one is… this is what I am advised by Bildisco, Your Honor.

Jack M. Zackin:

Only one is performing a job which would have been performed by a union employee.

Lewis F. Powell, Jr.:

Is the company still operating?

Jack M. Zackin:

The company has been reorganized.

It is operating now, although its business function has changed somewhat dramatically.

It was a… basically a wholesaler.

It is now in the manufacturing business.

And that was accomplished through the reorganization process of Chapter 11.

Sandra Day O’Connor:

Mr. Zackin, going back to the standard again that should be employed, does it make any sense in your view for the Court to consider requiring whatever the proof be to be made by clear and convincing evidence?

Is an evidentiary standard that is a little tougher an appropriate thing to consider?

Jack M. Zackin:

I don’t believe so, Justice O’Connor.

I think that the burden that the Third Circuit placed on a debtor is quite stringent in itself when one analyzes it.

It is really a twofold showing that must be made.

Number One, the debtor must show as a threshold that the contract is burdensome, and then, the burden is still on the debtor to show that the balancing of the equities tips in favor of rejection, that the harm to employees is outweighed by the benefit to everyone else involved in the reorganization process.

I think that that in itself is quite a stringent standard, especially in the absence of any suggestion in the Bankruptcy Code that collective bargaining agreements are to be treated differently than any other type of executory contract.

Under all other types of executory contracts, the so-called business judgment test, of course, is applied, and that is simply a requirement that the debtor show that rejection of the contract would benefit the estate.

I suggest that any time a debtor in possession moves to reject a contract, it is going to be able to show that, at least in the majority of the cases, or it wouldn’t be seeking to reject.

But in place of that benefit to the estate concept, which doesn’t give any import whatsoever to the harm to the non-debtor party to the contract, the Third Circuit has said, courts must focus attention in collective bargaining agreements on the harm to the non-debtor party, in this case the union employees, and consider what the potential impact of rejection is going to be on those employees.

I think that in itself is quite a leap forward from the business judgment test, and it is quite a bit of a more stringent showing which must be made.

If I might in the time remaining address myself to some of the arguments which have been made in opposition to the new entity theory, what we have is a criticism that… of the theory on the grounds that since management and operations and work force of a debtor in possession are often unchanged, the debtor in possession is more properly deemed as the alter ego of a pre-bankruptcy company rather than as a new entity.

I suggest that the Second and Third Circuits, both of which have adopted the new entity analysis, really had it right.

A Chapter 11 filing, although management may continue much as before, significantly changes the way in which a debtor must conduct its business.

William H. Rehnquist:

Mr. Zackin, do courts in trying to treat the relationships between another executory contractor whose contract has been rejected or accepted go into elaborate analysis about whether the debtor in possession is a new entity?

Jack M. Zackin:

No, Justice Rehnquist, they don’t, although I think the new entity theory is certainly consistent with the whole concept of rejection of contracts.

There is nothing which distinguishes–

William H. Rehnquist:

For analytical purposes, which should the debtor in possession be treated any differently if it is a collective bargaining contract that has been rejected than if it is an executory contract to supply widgets that has been rejected?

Jack M. Zackin:

–I think that because the courts have fashioned the business judgment test to apply to other types of executory contracts, there was really no reason to elaborate a theory as to why that standard was appropriate.

It was clearly appropriate because the Congress and the courts deemed that debtors in possession and bankrupt estates should not be bound by burdensome pre-bankruptcy contractual obligations.

It was more or less of a given.

So that the courts never had to really delve behind how a bankrupt company can disaffirm a contract when under controlling state law, presumably, that is a breach.

But in the context of collective bargaining agreements, where the courts have recognized special equities on the side of union employees, I think that it did take a little more elaboration on the part of the courts to explain just how it was getting to the result which it was achieving.

Jack M. Zackin:

But I certainly think you can make the same new entity argument with respect to any executory contract.

There is nothing inconsistent about it.

It was just, there was no need to do it, I think.

Thurgood Marshall:

Mr. Zackin, on this new entity point, one, the employees, and two, the union, what happens to that entity once you go into bankruptcy, Chapter 11, I mean?

Jack M. Zackin:

The union remains as the bargaining unit for the employees, assuming that the majority of the debtors’ employees are still members of that union.

There is no question under the Third Circuit standard that the union remains the collective bargaining agent for its employees, and that the debtor in possession is obligated to bargain with the union in good faith.

Thurgood Marshall:

But there is no contract?

Jack M. Zackin:

But there is… the way I would view it, there is a contract in existence which is… the enforcement of which is suspended.

In other words, as the Second Circuit said in the–

Thurgood Marshall:

The payment is suspended.

Jack M. Zackin:

–Pardon me?

Thurgood Marshall:

The payment is suspended.

Jack M. Zackin:

Well, the payment under the terms of the contract is suspended.

Thurgood Marshall:

I am talking about for most employees, payment of wages is rather important.

Jack M. Zackin:

Of course it is.

And that is why the union can be expected to demand that the debtor in possession bargain and to reach a fair wage rate if in fact the debtor in possession has indicated he is going to reduce the wages.

Thurgood Marshall:

I thought you said he could also bargain for a new contract.

Jack M. Zackin:

The debtor in possession and the union can bargain for a new contract, yes.

That goes along with the theory that the debtor in possession is a new entity, not a party to the contract.

It can enter into a new contract.

Thurgood Marshall:

Doesn’t that mean that the old contract goes out ahead of time?

Jack M. Zackin:

I think that it does mean that at least for the period of time the company is in Chapter 11, yes.

Byron R. White:

Could I ask you, was… the petition for reorganization, I gather, was approved?

Jack M. Zackin:

Yes, it was.

Byron R. White:

And under the new bankruptcy law, I suppose, you still have to make a showing under Chapter 11 like you did under Chapter 10, that you cannot… at least that you cannot pay your debts as they mature?

Jack M. Zackin:

There really is no… as I read the Bankruptcy Code, no explicit requirement that you must show that.

Byron R. White:

There was, wasn’t there?

Jack M. Zackin:

There was, you are correct–

Byron R. White:

Under Chapter 10.

Jack M. Zackin:

–under Chapter 10.

Byron R. White:

So you don’t have to make any showing that you are in financial trouble?

Jack M. Zackin:

Only, I think, in terms of the good faith requirements which are–

Byron R. White:

About what?

Jack M. Zackin:

–Well, that the motives… I believe the way the courts have defined good faith is that the motives in filing were legitimate business purposes in seeking to reorganize a failing business.

William H. Rehnquist:

How do you know… What is the standard for a failing business?

Jack M. Zackin:

I think that Justice White points out that you are not able to meet your debts as they become due, and–

Byron R. White:

You have to make some kind of a showing like that, don’t you?

Jack M. Zackin:

–Yes.

I think that that would certainly be a determining factor along with a balance sheet test, what are the value of the assets compared with the liabilities.

Byron R. White:

Well, if there is a… If you can’t pay your debts as they mature, I suppose that means all your debts.

Jack M. Zackin:

I think it must apply across the board, and I think if you meet that test, if you can’t pay your debts as they mature, you are certainly an eligible candidate for Chapter 11.

In closing, I would just like to state that what I believe the Third Circuit and the Eleventh Circuit in Brada Miller have done is to truly accommodate the goals behind the bankruptcy laws and the goals behind the labor laws, without forcing one to give way before the other.

The test that was formulated by the Third Circuit does not unduly promote the interests of organized labor to the point where it holds a stranglehold position on the fate of a Chapter 11 debtor, and at the same time, it does not unduly sacrifice the rights and the interests of organized labor to achieve a successful reorganization.

It is an integration.

It is truly a balancing test.

We think that it is fair to all parties involved in the reorganization process.

We think it is workable.

And for those reasons, we urge that this Court affirm the decision below.

Thank you very much.

Warren E. Burger:

Very well.

Do you have anything further, Mr. Wallace?

You have three minutes remaining.

Lawrence G. Wallace:

Thank you, Mr. Chief Justice.

As we point out on Page 16 of our brief, the National Labor Relations Act refers specifically to trustees in bankruptcy as persons covered by the act.

The Board here in its findings on Page 34-A of the appendix to the petition found that the respondent was an alter ego of Bildisco, using the term in much the way this Court used it in the Howard Johnson case, in a footnote that began,

“It is important to emphasize that in that case it was not an alter ego. “

And the collective bargaining agreement itself specified that it would apply to successors to Bildisco.

Here you have the same ownership under a different arrangement operating the same enterprise, and the contract therefore continued to apply under standard principles of the National Labor Relations Act.

Now, if a vendor of lumber or potatoes continues to supply the bankrupt debtor in possession until that contract is rejected, his rights are prescribed by the contract, as we understand the law.

The contract not only says what he should be paid.

Lawrence G. Wallace:

It will specify terms of delivery, when the payment should be made, et cetera.

There are rights prescribed by the contract.

The bankruptcy court doesn’t have some general measure of the market value of what he is entitled to for the services that he continued to–

Sandra Day O’Connor:

But, Mr. Wallace, doesn’t the Bankruptcy Act, Section 365(g)(1), if an executory contract is rejected, expressly provide that then it will relate back to the date of filing of the petition, so technically perhaps–

Lawrence G. Wallace:

–That is the source of–

Sandra Day O’Connor:

–the court is not–

Lawrence G. Wallace:

–confusion, because all that refers to in our view is a damage claim for rejection of further rights under that contract.

The other party to the contract can then claim that he was damaged, and can show what the monetary damages were, and that claim relates back, and he stands on the same basis as pre-petition creditors for those further claims, but while he was performing, up until the time of rejection, his rights are prescribed by the contract, and that is part of the administrative expense of trying to make this business thrive by assuring people that they can continue to deal with this business without worrying that their rights are going to be compromised by the pre-existing indebtedness.

And the same thing is true for employees.

The contract here under which they were working didn’t just prescribe wages.

It has many provisions about health contributions, welfare contributions, union dues, sick leave rights, paid holidays, et cetera.

All of those rights were prescribed by the contract just as if the employer had said to non-contract employees, if you stay on with me, it will be at $800 a month, and I will pay health insurance benefits.

Warren E. Burger:

Your time has expired now, Mr. Wallace.

Thank you, gentlemen.

The case is submitted.